Wondering what you think about this. We've all heard not to try to time the stock market. But what are your thoughts on the crypto market? Does the relative novelty of crypto, and the current widespread hysteria, provide opportunity for a smart person to take advantage of crypto market inefficiencies?

My thought: it's possible that there were lots of inefficiencies in the recent past, when it was all new. But now that everyone knows about it, and there's a lot of money on the line, seems to me a lot of smart people with lots of money must be in it. Once that's the case, it's hard to have confidence that the person you're trading with is dumber than you. So I figure it's hard to make an easy buck now, unless you really are ahead of the curve - which I am not.

As a mostly fun little experiment, I've challenged a co-worker, who is an active crypto trader, to see whether he can beat a hypothetical crypto market index that I set up. The index captures about 90% of the market, rebalanced monthly. Can talk more about details (like, unfortunately, how we're both going to ignore costs, which may render it mostly meaningless). We're going to see who wins at the end of the year.

Well, the P/E is pretty stable at *edit...undefined as it's something/0. My response would be the same for "Is the $US to Peso market efficient?". Although the Peso would be far less volatile and it's movements would be for reasons.

Given that I saw "market prices" for Bitcoin in the 14000's, the 13000's and the 12000's within seconds of each other in a Google search, at Coindesk, and a Winkdex I would say it is obviously not efficient. As to whether you or I can exploit that inefficiency, I would doubt it to beat heck. The people able to exploit it are the thousand or so investors who own 40% or more of all bitcoin. My guess is that both use of inside information and price manipulation are both common.

Last edited by nisiprius on Fri Jan 19, 2018 12:35 pm, edited 1 time in total.

Not as efficient as developed stock and currency markets. You get non-trivial discrepancies in pricings across different exchanges. You can't really short any of the cryptocurrencies except bitcoin (conversion rate to USD), and only indirectly via futures. Risk of the exchanges keeps some participants away, and it's not easy to transfer money to all the different exchanges and back to take advantage of price disparities. Given that seemingly a high percentage of trading activity is by amateur speculators and traders, there should be more opportunity for mistakes, and as established, there is evidence and theory supporting the idea that pricing errors would be harder to correct.

What keeps markets relatively efficient is the ability for profit seekers to trade based on available information, which moves prices up and down. It doesn't happen by accident. In less developed and efficient markets there are more barriers to information being incorporated uniformly into prices, relatively more noise traders, and so on.

Last edited by lack_ey on Fri Jan 19, 2018 12:27 pm, edited 1 time in total.

Another reason that it is not efficient, some of the demand is because of illegal activities and criminals hiding their money/transactions using crypto. Not the same thing with stocks or other FIAT currencies. You can't buy stocks for only the sake of money laundering or paying for illegal thing!

"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

Wondering what you think about this. We've all heard not to try to time the stock market. But what are your thoughts on the crypto market? Does the relative novelty of crypto, and the current widespread hysteria, provide opportunity for a smart person to take advantage of crypto market inefficiencies?

My thought: it's possible that there were lots of inefficiencies in the recent past, when it was all new. But now that everyone knows about it, and there's a lot of money on the line, seems to me a lot of smart people with lots of money must be in it. Once that's the case, it's hard to have confidence that the person you're trading with is dumber than you. So I figure it's hard to make an easy buck now, unless you really are ahead of the curve - which I am not.

As a mostly fun little experiment, I've challenged a co-worker, who is an active crypto trader, to see whether he can beat a hypothetical crypto market index that I set up. The index captures about 90% of the market, rebalanced monthly. Can talk more about details (like, unfortunately, how we're both going to ignore costs, which may render it mostly meaningless). We're going to see who wins at the end of the year.

Disclosure: I do not own any crypto.

How did you go about creating your index? I think that if you can replicate a total market crypto fund then it will do well. I am positive that the total market cap for cryptos will be over $1T this year. Currently $580B. Could be $5T easily. The hard part is to keep up with all of the ICOs because one new idea can be worth Billions at debut and there are uncountable amounts of new tokens being deployed every week. And as you mention, in practice it would be tough to keep costs low. Though transaction fees are not that high and some exchanges offer discounts if you use their native token.

Another reason that it is not efficient, some of the demand is because of illegal activities and criminals hiding their money/transactions using crypto. Not the same thing with stocks or other FIAT currencies. You can't buy stocks for only the sake of money laundering or paying for illegal thing!

That some people are holding cryptocurrencies for illegal activities does not alone make the market inefficient. Remember that the U.S. dollar is still the currency of choice for illegal activities and criminals.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Another reason that it is not efficient, some of the demand is because of illegal activities and criminals hiding their money/transactions using crypto. Not the same thing with stocks or other FIAT currencies. You can't buy stocks for only the sake of money laundering or paying for illegal thing!

That some people are holding cryptocurrencies for illegal activities does not alone make the market inefficient. Remember that the U.S. dollar is still the currency of choice for illegal activities and criminals.

I agree, but only US criminal "and may be few other countries" would trade in USD, while a UK criminal will be probably trading in UK and so on. Now 1 crypto (eg. bitcoin) can have demand from all the criminals around the globe since it is unregulated unlike their home country FIAT. That is a global demand (150 countries) on just couple of crypto currencies that are famous right now.

Last edited by BogleMelon on Fri Jan 19, 2018 12:42 pm, edited 1 time in total.

"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

How did you go about creating your index? I think that if you can replicate a total market crypto fund then it will do well. I am positive that the total market cap for cryptos will be over $1T this year. Currently $580B. Could be $5T easily. The hard part is to keep up with all of the ICOs because one new idea can be worth Billions at debut and there are uncountable amounts of new tokens being deployed every week. And as you mention, in practice it would be tough to keep costs low. Though transaction fees are not that high and some exchanges offer discounts if you use their native token.

I sum up the market cap of everything on that list to get total market cap. Then I invest proportionately in as many crypto as it takes, starting from the top, to achieve 90% market coverage. As of mid January, that was about 35 cryptos. Transaction costs not accounted for, because I have better things to do with my time - though, if they're substantial, then this is sort of unrealistic.

I don't *actually* invest in this. Just tracking the hypothetical best-case.

We started doing this just prior to the big crash that happened a few days ago.

How did you go about creating your index? I think that if you can replicate a total market crypto fund then it will do well. I am positive that the total market cap for cryptos will be over $1T this year. Currently $580B. Could be $5T easily. The hard part is to keep up with all of the ICOs because one new idea can be worth Billions at debut and there are uncountable amounts of new tokens being deployed every week. And as you mention, in practice it would be tough to keep costs low. Though transaction fees are not that high and some exchanges offer discounts if you use their native token.

I sum up the market cap of everything on that list to get total market cap. Then I invest proportionately in as many crypto as it takes, starting from the top, to achieve 90% market coverage. As of mid January, that was about 35 cryptos. Transaction costs not accounted for, because I have better things to do with my time - though, if they're substantial, then this is sort of unrealistic.

I don't *actually* invest in this. Just tracking the hypothetical best-case.

We started doing this just prior to the big crash that happened a few days ago.

I am going to guess that your friend is going to lose, unless he picks a couple of home-run ICOs. How often are you re-balancing?

I am going to guess that your friend is going to lose, unless he picks a couple of home-run ICOs. How often are you re-balancing?

I rebalance every month.

For his part, he just sent me a starting allocation (x% in bitcoin, y% in ethereum, ...) and has agreed to update me whenever he wants to make a trade (e.g. "rebalance as follows...", or "put 50% of BTC into NEO", or "pull out of the market altogether"). Will he be able to keep this up for a whole year? I don't know.

We are doing this because he believes he's smart enough and well-informed enough about crypto and blockchain technology to beat an index. If this were the stock market, I'd say "yeah right." But since crypto is a new thing - i.e. doesn't have decades of research showing how hard it is for an amateur investor to beat the market, as with stocks - I figure it would be fun to run the experiment and see. My hunch is that he's deluding himself. Of course, a single year of return on a highly volatile market doesn't prove anything. But it's fun.

(Regarding bets with friends: they're fun! E.g. I'm also in on a $100 bet with a friend regarding Vanguard Total Stock Market Index: I believe 2018 will not be as good a year as 2017. Statistically, the odds are in my favor. It's fun to put your money where you mouth is. That being said, I hope I lose!)

I would love to think the cryptocurrency market is efficient, but it is nowhere close. It moves way to much for not any real reason.
There are constant pump and dumps of coins that have a small enough market cap as to be manipulated. There are even chat groups dedicated to timing the pump and then timing the selloff.
Look at Tron. From what I have read, the coin is deficient in a number of ways from a implementation plan perspective, not to mention the allegations pertaining to its whitepaper. It went from a few cents to 20 cents and back below 7 cents in less than a month. And this was a Top 10-20 coin! Ripple is #3 and the owners of Ripple own 60% of the coin. Nothing to stop them from flooding the market and making a buck.

Lots of great blockchain technology, ideas, and groups out there, but the price manipulation is insane.

Very unlikely, in my opinion. Large crypto traders often deal among themselves, which indicates private information so all the traders are not working with the same information. The differences in valuation between the exchanges indicates the markets are not efficient at incorporating the value of public information. Regulation is lax and there are reports of trade manipulation.

As a mostly fun little experiment, I've challenged a co-worker, who is an active crypto trader, to see whether he can beat a hypothetical crypto market index that I set up. The index captures about 90% of the market, rebalanced monthly. Can talk more about details (like, unfortunately, how we're both going to ignore costs, which may render it mostly meaningless). We're going to see who wins at the end of the year.

This is just a massive transfer of wealth. My bet is that there's a lot of price manipulation going on, and that Bitcoin will go up and down, then up and down again, until the original concentrated owners have successfully disposed of their Bitcoin at a good price and own real cash currency instead. At that point, when the greater fools have been switched in, one thing or another will puncture the bubble and they will lose their money. The original owners will be very rich.

The short answer is "no, not at all". I think it was last week where exchanges in SK were showing a 20% spread on certain coins against other exchanges for no discernable reason.

I believe the higher Korean prices have been consistent quite a while. Just now I compared Kraken (US) and Bithumb (South Korea) prices and South Korea was 22% to 24% higher on every one I looked at. I would presume this can survive only due to restrictions in moving money out of South Korea.

Given that I saw "market prices" for Bitcoin in the 14000's, the 13000's and the 12000's within seconds of each other in a Google search, at Coindesk, and a Winkdex I would say it is obviously not efficient.

nisiprius....I observe the same thing (the wild gyrations we see in pricing) and reached a somewhat different conclusion: The crypto-currency market is brutally efficient.

I just don't know about the level of corruption and deception in that market, but your point is well-taken. Had not considered that aspect. Another reason I am keeping my distance from crypto-currency for the time being.

“If you don't know, the thing to do is not to get scared, but to learn.”

I fail to see how a market can be efficient when it is being driven by speculation, pump and dump, corruption, price manipulation, high costs, orders take a long time to fulfill, and very little regulation (and the threat of regulation causes massive price changes).

I fail to see how a market can be efficient when it is being driven by speculation, pump and dump, corruption, price manipulation, high costs, orders take a long time to fulfill, and very little regulation (and the threat of regulation causes massive price changes).

All of those accusations, with the exception of regulation, have been levied against stocks either recently or in the past.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings